Current Thinking

1st Quarter 2014 Economic & Market Review

Economy
The U.S. continues to travel down the road of modest recovery beaconed by a current domestic unemployment rate of 6.7% (through March) down from 7.6% a year ago. While Federal Reserve (“Fed”) Chair Janet Yellen has delinked Fed policy from the unemployment rate, the Fed remains accommodative by suppressing borrowing rates and continuing its bond purchasing program. Outside of the U.S., Japanese investors face the impact of the country increasing its national sales tax from 5% to 8%. Global eyes are on the Ukraine, watching for Vladimir Putin’s next move and the potential market impact.

Equity Markets
U.S. equity markets provided modest gains for the first quarter of 2014 (“Q1”). The S&P 500 Index, primarily representative of domestic large-cap stocks, rose 1.8% in Q1 compared to 0.8 % for the MSCI EAFE Index (representing large-cap international stocks). Overall, mid-caps (+3.5%) and large-caps (+2.1%) outperformed small-caps (+1.1%) domestically. In aggregate, value (statistical cheapness) was viewed favorably across the U.S. market capitalization spectrum. Emerging markets (MSCI EM Index – net) fell 0.4% in Q1, further compounding losses in a market where declines have outpaced advances for more than three years.

Fixed-Income Markets
Longer duration bonds had the most success in Q1. The Barclays Capital (“BarCap”) Long Government/Credit Index (+6.6%) outpaced both the BarCap U.S. Aggregate Bond Index (+1.8%) and the BarCap Intermediate U.S. High Yield Index (+ 2.8%). Cash continued to produce a yield near 0.0%.